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Wednesday, March 23, 2016

FROM A BYSTANDER BRICS launches new development bank

Russian President Vladimir Putin hosted the 7th BRICS summit from July 8-9,
2015 in the Siberian city of Ufa. The theme of the colloquy was BRICS
Partnership – a Powerful Factor of Global Development.

Formation of BRICS was spurred by the dominance of the American Dollar and
the US controlled voting pattern at IMF. The first formal meeting of leaders of
four countries -- Brazil, China, India and Russia -- was held in June 2009 in
Yekaterinburg, Russia. By then, the world economy had already gone into deep
depression, which began in 2008. In December 2010, South Africa joined as the
fifth member of the group.

Looking for an alternative to the US Dollar, the group focused on reforming
the global economy by creating new international financial institutions. The
first summit announced the need for a new “global reserve currency”, which
would be “diversified, stable and predictable.” That discussion eventually
culminated in the agreement to set up the New Development Bank (NDB) at the
sixth BRICS summit in Brazil in July 2014.

The most significant achievement at Ufa was the launching of the NDB. The
first Board of Governors Meeting was held at Ufa, under the Chairship of
Russian Finance Minister Anton Siluanov. Based in Shanghai, the Bank with a
capital of $100 billion will start operations in early 2016.

The summit also welcomed the completion of the ratification process of the
treaty establishing a $100 billion Contingent Reserve Arrangement (CRA) and its
entry into force. Its objective: any NDB members can get CRA liquidity support,
without harmful pre-conditions, to ease balance of payment pressures. NDB
members may now be encouraged to use CRA instead of IMF. Actually, CRA is
a window of the NDB. Unless IMF changes its voting patterns, it may face
serious challenges from CRA.

The 15th Shanghai Cooperation Organisation (SCO) summit was also held at the
same time. Since it was Russia's turn to chair BRICS and SCO and because there
is a convergence of the main focus of these two organisations, the conferences
were timed simultaneously.

Established in 2001, SCO had six members – China, Kazakhstan, Kyrgyzstan,
Russia, Tajikistan, and Uzbekistan. It now has eight members with the elevation
of Pakistan and India from “observer” status to full members. SCO has gradually
turned its focus for greater economic cooperation, though originally it was
meant for security cooperation.

Eurasia Economic Union (EEU) leaders were also at Ufa to discuss closer
economic cooperation with BRICS and SCO leaders. The union formed in January
2015, brings together five central Asian countries – Armenia, Belarus,
Kazakhstan, Kyrgyzstan and Russia. China has already made inroads in the
Eurasian autocracies with its liberal financial loans.

In another development the Articles of Association of the Asian
Infrastructure and Investment Bank (AIIB) was signed by 57 countries, including
Bangladesh, on June 29, 2015 in Beijing. President Xi Jinping announced at Ufa
that the China sponsored AIIB would collaborate closely with NDB and other
international financial institutions. AIIB is expected to be operational by the
end of 2015. The US and Japan are absent from the AIIB, which is seen as a
rival to the US dominated World Bank.

For China, it was an excellent opportunity to push its diplomacy and
dominate the summits. With its massive foreign exchange reserve of $3.9
trillion (World Bank, 2014), China is set to play a larger financial role in
global economy.

For Russia, the chairmanship of BRICS and SCO summits could not have come at
a better moment. With harsh sanctions imposed by the US and EU following
Moscow's annexation of Crimea in 2014, the Russian economy has suffered a jolt.
The desperation has increased because of the fall of oil prices, a major source
of revenue for Moscow. Moscow is happy that the CRA may provide Russia much
needed financial support.

China continues to do well in terms of economic growth (7.4 percent, WB
2014). India, too, is doing well (7.4 percent). Russia is going through an
imposed depression (0.6 percent). Brazil has lost its luster (0.1 percent).
South Africa's smaller economy is not doing badly (1.5 percent). In spite of
differences in growth rates, the total GDP of BRICS is almost equal to that of
US. As a block, it has the economic weight to make substantial contributions in
restructuring world financial architecture.

BRICS represents 41 percent of global population, 21 percent of the world
GDP, 17 percent of global merchandise and 45 percent of world agricultural
output. However, economic growth is the key to BRICS unity. Economic stagnation
will lead to political upheavals and weaken the group.

Sino-Russian “anti-West” entente makes them strange bed partners with
largely “pro-West” Brazil and South Africa. India is somewhere in the middle –
trying to balance the two, holding a faded non-aligned flag. What is impressive
is that despite being dispersed in four continents and having diverse political
systems, BRICS holds together.

BRICS can rightly take credit for launching NDB. This novel institution
should help in consolidating BRICS as a forum. NDB's emergence in the global
financial scene will no doubt challenge the Bretton Woods system that we have
been so familiar with since the WWII. It will not be surprising if a new
international reserve currency is devised by NDB in the coming years.

The 77-paragraph Ufa Declaration emphasised the importance of strengthening
BRICS' solidarity and mutually beneficial cooperation. It stressed efforts to
respond to emerging challenges, ensure peace and security, and promote
development in a sustainable way.

Despite Kremlin's standoff with the West, the gathering of so many leaders
at Ufa proved that President Putin is not alone. Russian Foreign Minister
Sergei Lavrov said, “BRICS illustrates a new polycentric system of
international relations” demonstrating the increasing influence of “new centres
of power.”

BRICS seems set to challenge West's domination of the global financial
system.